Speaker 1: Thank you so much for joining us on the special
Speaker 1: edition of Bloomberg Daybreak. Merry Christmas, everybody. Markets are closed
Speaker 1: for this holiday. I'm Nathan Hager coming up this hour.
Speaker 1: It has been another banner year for the bulls on
Speaker 1: Wall Street. Will the new year bring as many happy
Speaker 1: returns for equity investors as twenty twenty four We will
Speaker 1: bring you a special stock round table with Lori Calvacina,
Speaker 1: head of US Equity Strategy at RBC Capital Markets, and
Speaker 1: Cameron Dawson, chief investment officer at New Edge Wealth Plus.
Speaker 1: We're wrapping up the most wonderful time of the year
Speaker 1: for retailers, So who were the big winners? We'll ask
Speaker 1: retail analyst Bert Flickinger, managing director at Strategic Resource Group. First,
Speaker 1: we want to focus on the economy as a whole.
Speaker 1: The Federal Reserve is coming off its final rate cut
Speaker 1: of the year. J. Powell and Company surprised Wall Street
Speaker 1: not with the interest rate reduction, but when they changed
Speaker 1: gears and put their policy focus back on inflation once again.
Speaker 2: We you know, we've had a a year on projection
Speaker 2: for inflation and it's kind of fallen apart. As we've
Speaker 2: approached at the end of the year. So that is
Speaker 2: certainly a large factor in people's thinking. I can tell
Speaker 2: you that might be the single biggest factor. Is inflation
Speaker 2: has once again underperformed relative to expectations. It's still you know,
Speaker 2: going to be between two and a half and three.
Speaker 2: It's way below where it was. But you know, we
Speaker 2: really want to see progress on inflation.
Speaker 1: And that was fair Chair J. Powell last week following
Speaker 1: the Central Banks final policy decision of twenty twenty four.
Speaker 1: So what's in store for next year? To answer that,
Speaker 1: we're pleased to welcome Tom Porcelli, chief US economist at
Speaker 1: PGIM Fixed Income. Tom. Great to have you with us
Speaker 1: on this holiday. And I hate to say inflation's been persistent,
Speaker 1: but are we going to see progress?
Speaker 3: Well, good to be with you, Nathan as always, and
Speaker 3: I think, you know, let'st I would reframe it a
Speaker 3: little bit. We have seen a lot of progress. I mean,
Speaker 3: if you just look at you know, a pick your
Speaker 3: flavor of inflation, but if you just look at core PCEE,
Speaker 3: core PC with what as high as nearly six percent
Speaker 3: and we're down to what two point eight percent now,
Speaker 3: So there's been quite a lot of progress from an
Speaker 3: inflation perspective. And you know what was interesting about about
Speaker 3: Powell's press conference at the recent FOMC meeting was he
Speaker 3: acknowledged I think a number of the things that that
Speaker 3: are challenges from inflation perspective that we can exclude from inflation, right, Like,
Speaker 3: so shelter is a great example. You know, they they
Speaker 3: and we all recognize that there are these calculation challenges
Speaker 3: from a shelter perspective, so you remove it, and you know,
Speaker 3: this is how the whole supercre idea sort of came
Speaker 3: came to be. Well, what I would say is I'm
Speaker 3: not a huge fan of supercore because I think it
Speaker 3: also strips out the things that are deflating. And I
Speaker 3: don't know why you do. That's part of the consumable basket,
Speaker 3: So that that to me just seems a little intellectually disingenuous.
Speaker 3: So what I would say is this, just take headline inflation,
Speaker 3: take core inflation, strip out shelter, and when you do that,
Speaker 3: what you see is that inflation is actually pretty tame.
Speaker 4: Right.
Speaker 3: So if we just use CPI as as an example
Speaker 3: of that, you know, like headline CPI is running out
Speaker 3: well one point six percent pace x shelter and core
Speaker 3: CPI is running out a two point one percent pace
Speaker 3: x shelter.
Speaker 5: So you know, I.
Speaker 3: Was, I was, I was a little bothered by by
Speaker 3: the idea of this notion of sticky inflation. I mean,
Speaker 3: I think I think a lot of us expected inflation
Speaker 3: would remain relatively elevated relative to target, but we continue
Speaker 3: to drift in the right direction. And I'm sorry, I'll
Speaker 3: say one last thing on this, Nathan, and then and
Speaker 3: then I'll stop. You know, I think about not just
Speaker 3: the not just the idea of of of stripping out shelter,
Speaker 3: but let's acknowledge that in real time shelter prices are slowing,
Speaker 3: so that will will continue to act as a sort
Speaker 3: of a as a weight on inflation as that continues
Speaker 3: to slow down. But maybe more important, when I look
Speaker 3: at wages, the direction of travel for wages I think
Speaker 3: is pretty clear. I mean, just look at quit rates
Speaker 3: that that are, you know, sort of getting clobbered. You know,
Speaker 3: that's that's yet another factor that I think we do
Speaker 3: not have to worry about because wages will continue to slow.
Speaker 3: So I think the inflation story is is is at
Speaker 3: least a bit more benign than what Powell suggested, So.
Speaker 1: Are you thinking then that the Fed could be more
Speaker 1: open to accelerating the pace of rate cuts more than
Speaker 1: they said they were planning to last week when they
Speaker 1: surprised the market with this expectation of just two cuts
Speaker 1: for all of next year.
Speaker 3: Yeah. I think this is the one thing that I
Speaker 3: actually did agree with Powell on. I think that, you know, look,
Speaker 3: as as a as a central banker, you know, you
Speaker 3: you relish optionality and and and I think you're and
Speaker 3: you're supposed to because you want the flexibility to be
Speaker 3: able to adjust as as the backdrop sort of evolved.
Speaker 3: So I have a ton of sympathy for that. So
Speaker 3: the short answer is, yes, I think you're you're absolutely
Speaker 3: supposed to acknowledge that you could see a faster pace
Speaker 3: of of rate cuts and and and indeed you could
Speaker 3: certainly see a slower pace depending how the data evolved.
Speaker 3: But I think again the problem for me is he
Speaker 3: kept on, pal kept on talking about, you know, data dependency,
Speaker 3: but I don't know if that's quite what it is.
Speaker 3: And I don't want to split hairs on this, but
Speaker 3: it really strikes me more as data point dependency, and
Speaker 3: that to me is a problem. And it's a problem
Speaker 3: because we all know this, right, I mean, we could
Speaker 3: all we could do an entire segment on this from
Speaker 3: one point alone. The data have been very volatile, more
Speaker 3: so than than what we've seen certainly pre pre COVID.
Speaker 3: And so think about the coming you know, in the
Speaker 3: next couple of weeks, we're gonna get what, We're gonna
Speaker 3: get a payroll report, and then we're going to get
Speaker 3: a CPI report. What if you get a clunker, right,
Speaker 3: what if you get a clunker of a payroll report,
Speaker 3: the market is then going to immediately start to sort
Speaker 3: of build in the idea of, oh well maybe if
Speaker 3: it is going to have to do more. So I
Speaker 3: think this is this is part of the problem with
Speaker 3: data point dependency.
Speaker 1: Speaking with Tom Porcelli, chief US economist at PGM Fixed Income,
Speaker 1: So what should the FED be focusing on then, Tom,
Speaker 1: I mean, at the meeting last week it seemed as
Speaker 1: though FED Chair pal was really laser focused now on
Speaker 1: inflation as opposed to potential risks to the labor market.
Speaker 1: Should be they be taking a more holistic approach.
Speaker 3: I think that's exactly right. I mean, look, they are
Speaker 3: a dual mandate Central bank, I think that you're supposed
Speaker 3: to be focused on both of these. Now, both of
Speaker 3: these are parts of the mandate. Now, of course, we
Speaker 3: all recognize that there are points where you know one
Speaker 3: will be fine and the other will be, you know,
Speaker 3: sort of deteriorating or accelerating, and so you know, you
Speaker 3: might want to sort of shift your focus to some extent.
Speaker 3: But I think what we have to acknowledge is that
Speaker 3: from a labor market perspective, right, because it's clear that
Speaker 3: he is shifted, right, he's starting the process of shifting
Speaker 3: away from labor, which is what they had been focused
Speaker 3: on over the prior few meetings, which is why they've
Speaker 3: delivered one hundred basis points of cuts at this point.
Speaker 3: But it's pretty clear that they're shifting back toward inflation. Now,
Speaker 3: I would caution against doing that too forcefully, because what
Speaker 3: we know is that there are some cracks that are
Speaker 3: forming in the labor backdrop. Now, again, I would hasten
Speaker 3: to add just because I'm saying cracks does not mean
Speaker 3: that I think the floor is going to fall out
Speaker 3: from from beneath labor. In fact, I don't think that's
Speaker 3: going to be the case at all. I think labor
Speaker 3: will be fine. I mean, you know, the continued economic
Speaker 3: expansion is is and has been our call over the
Speaker 3: coming and for the coming year, So you know, I
Speaker 3: want to sort of level set for everyone on that.
Speaker 3: But that does not, you know, mean that we should
Speaker 3: take our eyes off the fact that quit rate is
Speaker 3: getting cloppered, the hiring rate is slowing down. Confidence toward
Speaker 3: labor has deteriorated, right per the Conference boards labor differential,
Speaker 3: and that has a very good relationship with the unemployment rate,
Speaker 3: which is up what amost a hundred basis points from
Speaker 3: from the nearby low. So so you know, these are
Speaker 3: our realities. I mean, labor has slowed down. Demand at
Speaker 3: large has really slowed down. So I don't think we
Speaker 3: should take our eye and I don't think the Fed should,
Speaker 3: and I don't think that they will take their eye
Speaker 3: off of labor. I just think that shifting these focuses
Speaker 3: from like one mandate to the other, I think just
Speaker 3: lent itself to volatility, particularly as it relates to volatile
Speaker 3: economic reports, which is what we've been getting.
Speaker 1: One potential possibility of volatility here we haven't talked about
Speaker 1: just yet is the incoming Trump administration and how policy
Speaker 1: could affect the economic trajectory going forward, How do you
Speaker 1: factor that in? How does the FED factor that in?
Speaker 3: Yeah, I think I think Powell had it quite right
Speaker 3: when when he said, you know, they just they can't
Speaker 3: build it into their forecasts at this point. And I
Speaker 3: have nothing but sympathy for that. The reality is we
Speaker 3: just don't know what these policies are actually going to be,
Speaker 3: So for better or for worse, you know, the FED
Speaker 3: is going to have to be reactionary.
Speaker 1: How do you expect the FED to react then? Given
Speaker 1: to how what kind of uncertainty we have for Trump
Speaker 1: administration policy?
Speaker 3: Carefully? I mean, I think that you know, we have
Speaker 3: to recognize there are extremes from a tariff perspective and
Speaker 3: from an immigration perspective that could do some damage. From
Speaker 3: from an economic perspective, if you get more modest versions
Speaker 3: of tariff and immigration policy, then it probably you know,
Speaker 3: doesn't turn out to be nearly as bad.
Speaker 6: Right.
Speaker 3: So my view is that I think people are putting
Speaker 3: a little too much emphasis on the negative, and I
Speaker 3: think they're putting a little too much emphasis on the positive.
Speaker 3: And I think ultimately, if we get more modest versions
Speaker 3: of immigration and tariff policy. I think that our view
Speaker 3: that this is going to be you know, sort of
Speaker 3: a roughly two percent year in twenty twenty five, I
Speaker 3: think we'll remain firmly intact.
Speaker 1: Is a two percent inflation target still realistic for this FED?
Speaker 3: I mean I don't know if it was ever really
Speaker 3: totally realistic to I mean just just sort of thinking
Speaker 3: over history. I mean, look, the central banks want an
Speaker 3: anchor and two percent is just the sort of the
Speaker 3: number that they landed on. So in that context, I
Speaker 3: have sympathy for a target. Is this supposed to be
Speaker 3: two point zero percent? That's a completely debatable point. I mean,
Speaker 3: there's nothing empirical that really drives home that two point
Speaker 3: zero percent is the right number. And if you think about,
Speaker 3: you know, where inflation spends most of its time, it's
Speaker 3: not at two point zero percent, So you know, look,
Speaker 3: should the FED go to a range sort of like
Speaker 3: the RBA, the Reserve Bank of Australia like they do.
Speaker 3: I mean, I think that that is a reasonable discussion,
Speaker 3: but the FED has been pretty clear that that's not
Speaker 3: going to be part of any of the debate that's
Speaker 3: happening internally, and two point zero percent is going to
Speaker 3: be the target for the foreseeable future.
Speaker 1: Where do you put FED credibility right now? Given that
Speaker 1: they kicked off the rate cut cycle so quickly slowed
Speaker 1: down just a bit, now we're projecting so much fewer
Speaker 1: rate cuts into next year.
Speaker 5: Yeah.
Speaker 3: I mean, look, I've been speaking with a number of folks,
Speaker 3: you know, post the fom C meeting, and I think
Speaker 3: a lot of them are sort of scratching their head. Okay,
Speaker 3: you know what exactly just happened, and not just at
Speaker 3: the FOC meeting that just passed, but over the last
Speaker 3: few fo C meetings, So you know, is credibility being
Speaker 3: tarnished or dinged up here? No, I don't think that's
Speaker 3: the case. I think the FED has really very very
Speaker 3: much earned the credibility that they do have. But I
Speaker 3: do think people are are are wondering aloud about you know,
Speaker 3: do they have it right? So there's I wouldn't call
Speaker 3: it a crisis of confidence, not by a long shot,
Speaker 3: but I do think people are are wondering if they
Speaker 3: have the right take on this.
Speaker 1: Really appreciate this, Tom, thanks for coming on with us
Speaker 1: on the Christmas holiday. That's Tom Porcelli with us here
Speaker 1: us economist at PGIM Fixed Income. And as we continue
Speaker 1: on the special holiday edition of Bloomberg Daybreak, we're going
Speaker 1: to bring you a special roundtable looking at stocks in
Speaker 1: twenty twenty five. We're going to speak with Lori Calvacina,
Speaker 1: head of US Equity Strategy at RBC Capital Markets, along
Speaker 1: with Cameron Dawson, chief investment officer at New Edge. Well,
Speaker 1: so stay with us. It's twenty minutes past the hour.
Speaker 1: I'm Nathan Hager, and this is Bloomberg. Thanks for being
Speaker 1: here on this special edition of Bloomberg Daybreak. Markets are
Speaker 1: closed for the Christmas holiday. I'm Nathan Hager. We now
Speaker 1: turn from the economy in twenty twenty five. So the
Speaker 1: stock market twenty twenty four has certainly been a good year.
Speaker 1: If you are a bull on Wall Street, will it
Speaker 1: be even more happy returns in the new year. For that,
Speaker 1: we're please welcome two of our favorite analysts on this market,
Speaker 1: Lori Calvacina, head of US Equity Strategy at RBC Capital Markets,
Speaker 1: and New Edge Wealth chief investment officer Cameron Dawson, for
Speaker 1: a holiday stock roundtable. Thanks to both of you for
Speaker 1: being here. I mean, we've had a more than twenty
Speaker 1: percent gain I think for the SMP five hundred year
Speaker 1: to date, I'll start with you, Lourie. Can the market
Speaker 1: keep up that kind of momentum into twenty twenty five?
Speaker 6: So thanks for having me, Nathan, And look, you know,
Speaker 6: I've got a ten percent target on the market for
Speaker 6: twenty twenty five, at least where the market closed when
Speaker 6: we put our numbers out. So we've been looking for
Speaker 6: sixty six hundred, and we think that's going to be
Speaker 6: another solid year of gains in the US eclby market,
Speaker 6: probably a little bit slower than what we saw this year,
Speaker 6: and we do think that we are going to have
Speaker 6: you know, what some of my colleagues term is potholes, right,
Speaker 6: some bounce of five to ten percent type drawdowns. So
Speaker 6: we don't necessarily think it's going to be a completely
Speaker 6: smooth ride. But at the end of the day, we
Speaker 6: think a continued moderation in inflation is going to help
Speaker 6: keep PE multiples elevated, and we think a solid earnings
Speaker 6: grows back and a solid economy are also going to
Speaker 6: help propel this market higher. But there may be some
Speaker 6: volatility here and there that we have to deal with.
Speaker 1: Cameron. We have seen a lot of analysts raise their
Speaker 1: price targets for the SMP five hundred, particularly after the
Speaker 1: election of President elect Donald Trump. Where are you sitting
Speaker 1: at this point.
Speaker 7: Well, it does create an interesting scenario where we're now
Speaker 7: seeing that overall in the market we have stretch positioning,
Speaker 7: stretch sentiments, stretched valuations, as well as pretty lofty growth
Speaker 7: expectations depending on where you're looking at earning vestiments. All
Speaker 7: of those things don't have to be a death knell
Speaker 7: for forward returns. They're usually not good timing tools, but
Speaker 7: it could be that we have to spend some time
Speaker 7: growing into those higher valuations, which lead.
Speaker 4: Us to expect two.
Speaker 7: Distinct scenarios for the market in twenty twenty five. We
Speaker 7: think we're either going to have a talking heads market,
Speaker 7: a road to nowhere kind of sideways chopped that looks
Speaker 7: like twenty fifteen or twenty eighteen, giving us time to
Speaker 7: grow into those high valuations, or we have a prints
Speaker 7: market where we sing, let's go crazy, let's party like
Speaker 7: it's nineteen ninety nine, and we actually have a bubble
Speaker 7: scenario where we have another strong year of returns driven
Speaker 7: by valuation expansion, but of course we know what comes
Speaker 7: on the other side. Of melt ups, which is typically
Speaker 7: melt down. So in either scenario, we think that we
Speaker 7: could have this increase in volatility instead of that low
Speaker 7: volatility up into the right market that we've been in
Speaker 7: for the last two years.
Speaker 1: Love the eighties metaphors. Is this a nineteen eighties moment
Speaker 1: for you, Laurie?
Speaker 5: Oh?
Speaker 6: Look, I do agree that we're going to have more
Speaker 6: of that volatility, and I think one thing that makes
Speaker 6: things so challenging is just this idea of animal spirits
Speaker 6: being so strong post election and taking us into the
Speaker 6: new year, and so on the one hand, we do
Speaker 6: think that those good vibes get us off to a
Speaker 6: good start. We heard a lot about companies in particular,
Speaker 6: just seeing activity being frozen quarters and months ahead of
Speaker 6: the election, so we expect some of that to be
Speaker 6: unlocked and to really give us some good vibes. And
Speaker 6: we've also seen consumer sentiment improve post election, and that
Speaker 6: is something that's very normal after elections, including changings of
Speaker 6: the guard. I do sort of sympathize with that possibility
Speaker 6: of the prince market. I think that one of the
Speaker 6: things that's tough for forecasters in twenty twenty five is
Speaker 6: that you know, we all put out forecasts and we
Speaker 6: have to articulate a base case, but the bear case
Speaker 6: and the bull case sort of the tails around that forecast.
Speaker 6: It seems like those are higher probability on both sides
Speaker 6: of the equation, and those tales are just fatter in
Speaker 6: the new year. And so I think the idea of
Speaker 6: you know, kind of twelve month visibility, I'm not entirely
Speaker 6: sure that we have it right now, to be honest,
Speaker 6: I think we do our best as forecasters, but we
Speaker 6: have to admit that things are going to be changing
Speaker 6: quite rapidly in the year ahead. There's going to be
Speaker 6: policy developments out of DC, and I think Cameron hit
Speaker 6: the nail on the head in terms of stretched sentiment
Speaker 6: and stretched valuation, and those things can last. It's very
Speaker 6: hard to predict exactly when they pop out, but they
Speaker 6: do tend to invoke some pain on the other side,
Speaker 6: and I think that makes it very very tricky to
Speaker 6: time everything next year.
Speaker 1: So if we have this kind of froth in the
Speaker 1: market right now, this lack of clarity, what do you
Speaker 1: need to see, Cameron to bring more clarity? What are
Speaker 1: you going to be looking for in the next couple
Speaker 1: of months for us.
Speaker 7: It all comes down to earning sestiments, and if you
Speaker 7: look at what has been the key underpinning driver of
Speaker 7: the last two years of the bull market has been
Speaker 7: that twelve months forward earning sestiments continue to rise. And
Speaker 7: we think in the next month, when we start the
Speaker 7: fourth quarter earning season at the end of January, we're
Speaker 7: going to start putting some of these earning vestments to the.
Speaker 4: Test, because this is the first quarter that you had.
Speaker 7: The expectation that the four ninety three, those non NAG
Speaker 7: seven names.
Speaker 4: Will really start picking up the.
Speaker 7: Slack and earnings growth and pulling their weight. The question
Speaker 7: is is that a bar that's too high. What you
Speaker 7: have in the four ninety three going into next year
Speaker 7: is a big reacceleration in earnings growth, and so we.
Speaker 4: Have to ask the question of can that.
Speaker 7: Part of the market truly deliver or are we still
Speaker 7: having to fall back on this small subset of MAG
Speaker 7: seven names that have been such a key underpinning of
Speaker 7: the overall earnings estimates. So we're watching that twelve month
Speaker 7: forward number on EPs estimates very closely because if that
Speaker 7: starts the flatten oute market returns likely flatten out as well.
Speaker 1: We're speaking with Cameron Dawson, the chief investment officer at
Speaker 1: new Edge Wealth, and Lori Calvacina, head of US equity
Speaker 1: strategy at RBC Capital Markets. Laurie, how do you view
Speaker 1: the earnings backdrop heading into twenty twenty five? What do
Speaker 1: you need to say?
Speaker 6: Well, look, I think Cameron raised some excellent points, and
Speaker 6: if I think about, you know, the earnings environment, I
Speaker 6: would say sort of three things have been coming up
Speaker 6: in my conversations. I am looking for two seventy one
Speaker 6: on smp EPs next year. The consensus is about two
Speaker 6: seventy five, so we're a little bit below, you know,
Speaker 6: kind of that bottom up consensus, but kind of putting
Speaker 6: that aside, you know, I would say three things is
Speaker 6: number one. If you look at this past year twenty
Speaker 6: twenty four, there was an enormous amount of download guidance
Speaker 6: that happened before reporting season actually kicked off, So companies
Speaker 6: really tried to keep the bar very low, and I
Speaker 6: think that set them up very well for this year.
Speaker 6: So I'm very curious to see if companies try to
Speaker 6: pull that rabbit out of a hat again in twenty
Speaker 6: twenty five. So you know, I'm not expecting, frankly, the
Speaker 6: tone to be all that great when that reporting seasons
Speaker 6: kicks off in late January. The second thing is I
Speaker 6: want to see what companies say about the dollar. We've
Speaker 6: seen an increase in the dollar a year over a year,
Speaker 6: and that does tend to push earning's revisions down. We
Speaker 6: haven't really seen that yet, but it does tend to
Speaker 6: hit most sectors in the market, aside from things like financials,
Speaker 6: reads and utilities. So we're watching to see if we
Speaker 6: might get some truing up there. And then the last thing,
Speaker 6: you know, that I'm really focused on when we get
Speaker 6: that January reporting season starting up is what are companies
Speaker 6: saying about margins and costs. Bloomberg does a great job
Speaker 6: of the Bloomberg Intelligence folks of tracking the bottom up
Speaker 6: sell side consensus estimates, and what they're showing in their
Speaker 6: margin stats is that we've been seeing twenty twenty five
Speaker 6: operating margins for the S and P really coming down
Speaker 6: since the middle of twenty twenty four, and that's really
Speaker 6: coincided in my work with just increased concerns about cost
Speaker 6: and inflation. We really do think that we're going to
Speaker 6: need to see sort of what companies are saying about
Speaker 6: that cost environment because strong margins have really been keeping
Speaker 6: earnings forecasts aloft, and if that story ends, I think
Speaker 6: it could be problematic for stocks.
Speaker 1: It's really interesting to bring up those points about the
Speaker 1: dollar and about margins the potential for higher costs. That
Speaker 1: raises the issue of what policy could mean for companies
Speaker 1: going forward in terms of FED policy and fiscal policy
Speaker 1: out of Washington, d C. How much does that affect
Speaker 1: how stocks could travel in twenty twenty five For you, Cameron, Well.
Speaker 7: It's been very interesting over the last couple of years
Speaker 7: how resilient stocks have been to changes and expectations for
Speaker 7: FED policy. If we contrast how we started twenty twenty
Speaker 7: four with six cuts priced in six and a half
Speaker 7: cuts actually into the beginning of the year, and at
Speaker 7: the end of the day we only got four cuts,
Speaker 7: and that we had a more hawkish FED than expected.
Speaker 4: Stocks had this ability to shake that off.
Speaker 7: The question is can they continue to do that if
Speaker 7: the Fed does not deliver on those cuts in twenty
Speaker 7: twenty five that are now projecting to be two cuts
Speaker 7: for next year. If we think about how that translates
Speaker 7: inn into the dollar, If the Fed continues to be
Speaker 7: in this position where they're seen as more hawkish, more
Speaker 7: restrictive in their policy than the rest of the world,
Speaker 7: which is having to cut because their economies are weaker.
Speaker 7: The end result is that you have that continued upward
Speaker 7: pressure on the dollar, which, of course, as Lori pointed out,
Speaker 7: could mean challenges for company earnings that are relying on
Speaker 7: overseas revenues. So if we think then in the context
Speaker 7: of financial conditions, we still are in a place where
Speaker 7: financial conditions are very loose, very easy, and considered to
Speaker 7: be supportive or even stimulative for growth. The question for
Speaker 7: twenty twenty five is how that progresses. If the FED
Speaker 7: continues to remain relatively hawkish to the rest of the world,
Speaker 7: could we see financial conditions tighten and thus feed into
Speaker 7: risk asset prices.
Speaker 1: What's your view on that, Laurie, Do you think financial
Speaker 1: conditions are going to tighten and can companies continue to
Speaker 1: sort of look past some of the hawkishness that is
Speaker 1: starting to build up in the FED.
Speaker 6: Well, it's a great question, Nathan, And I'll tell you know,
Speaker 6: after this last FED meeting, you know, there were sort
Speaker 6: of two things that jumped into my mind based on
Speaker 6: you know, sort of said conversations and said policy impact
Speaker 6: on data from the past year. And the first one was,
Speaker 6: if I think back to what I was reading from
Speaker 6: companies in our transcript reviews, you know, really earlier on
Speaker 6: in the year, one of the big points of uncertainty
Speaker 6: that companies were struggling with was just the sort of
Speaker 6: uncertainty over the path of interest rates. And so to
Speaker 6: the then that we're bringing some of that uncertainty back,
Speaker 6: I do worry a little bit that it could weigh
Speaker 6: on corporate confidence. The second thing is if I think
Speaker 6: about my own modeling for S and P earnings. I've
Speaker 6: been talking about this a lot in my meetings with
Speaker 6: investors lately. It's not that the debt burdens are unmanageable,
Speaker 6: but I have, you know, one line item in my
Speaker 6: earnings model where we try to forecast interest expense relatives
Speaker 6: to sales, and it's based on a variety of macro indicators.
Speaker 6: And you know, long story short, that part of my
Speaker 6: model always behaves very very well, and the interest expense
Speaker 6: has tended to be pretty low. What I've noticed the
Speaker 6: last couple quarters is that the interest expense line item
Speaker 6: has been coming in a bit hotter than my forecast.
Speaker 6: And then I also, you know, recently took a look
Speaker 6: at the effect of interest rates that S and P
Speaker 6: five hundred companies are paying on the debt they have outstanding,
Speaker 6: and that's moved out pretty meaningfully. So overall, I look
Speaker 6: at this as it just seems like it's getting a
Speaker 6: little bit harder for companies to manage other debt burdens
Speaker 6: from an interest rate perspective, and so I do want
Speaker 6: under if maybe that could dampen corporate confidence just a
Speaker 6: little bit in the new year.
Speaker 1: And Cameron, what do you see as potentially the biggest
Speaker 1: headwind to the rally as we get into twenty five.
Speaker 4: I would certainly agree with Lori.
Speaker 7: The idea is that a lot of companies were banking
Speaker 7: on the FED bailing them out in twenty twenty five.
Speaker 7: It was a survived to twenty twenty five kind of mentality,
Speaker 7: mostly within the small and mid cap line of things,
Speaker 7: where we tend to see less profitable companies, more reliance
Speaker 7: on short term debt and higher overall debt levels. And
Speaker 7: so if we think about the FED staying tighter and
Speaker 7: interest rates staying higher, that would certainly create a challenge
Speaker 7: for companies that we're expecting the exact opposite to happen,
Speaker 7: So that could effectively weigh on some of this hope
Speaker 7: and dream for a cyclical recovery because you're not getting
Speaker 7: the support from lower interest rates, and just create an
Speaker 7: earnings headwind that is not contemplated in the market that's
Speaker 7: trading still at twenty two times forward earnings. So it
Speaker 7: certainly would be a challenge and potentially something that would
Speaker 7: come right into terms with this high valuation.
Speaker 1: Stay with us. We're going to continue this conversation with
Speaker 1: Cameron Dawson of New Edge Wealth and RBC Capital Markets
Speaker 1: Lori Calvacina. See what areas of the markets you two
Speaker 1: like in twenty twenty five. As this special Christmas edition
Speaker 1: at Bloomberg Daybreak continues, I'm Nathan Hager, and this is Bloomberg.
Speaker 1: Thanks again for being with us on this special edition
Speaker 1: of Bloomberg Daybreak. I'm Nathan Hager. Markets are closed for
Speaker 1: the Christmas holiday, but we continue our market roundtable now
Speaker 1: with Cameron Dawson, chief investment officer at New Edge Wealth
Speaker 1: and RBC Capital Markets, Head of US Equity Strategy, Lori Calvcina,
Speaker 1: And as we wrap up this conversation, let's talk about
Speaker 1: some areas of the stock market that you both like
Speaker 1: in twenty twenty five. How about we start with you, Cameron, Well, we.
Speaker 7: Are looking more at value areas going into twenty twenty five.
Speaker 7: Buying value broadly. We think that there are a lot
Speaker 7: of low quality and value traps within the overall value style,
Speaker 7: but the degree of underperformance has been so pronounced versus
Speaker 7: growth that we think a lot of companies are just
Speaker 7: simply being ignored. If you look over the last two years,
Speaker 7: growth or value has underperformed growth by over sixty percent,
Speaker 7: which just leaves rooms for more valuation kind of buffer
Speaker 7: for those lower, lower priced companies.
Speaker 4: So we're being selective.
Speaker 7: We're putting a quality overlay on that value side of things,
Speaker 7: looking for good cash flow, good return on invested capital,
Speaker 7: but looking for names that are trading at a discount
Speaker 7: simply because they have been left behind over the last
Speaker 7: two years.
Speaker 1: It feels like growth has been the place to be
Speaker 1: though for quite a while. Laurie, what's your view look,
Speaker 1: I would.
Speaker 6: Just say on growth versus value. You know, in our
Speaker 6: year head outlook, we gave value a tiny edge just
Speaker 6: because growth has been so crowded and so overvalued. But
Speaker 6: one of the things that has come up up in
Speaker 6: conversations over the last few weeks has just been there's
Speaker 6: not as much opportunity and value as there was six
Speaker 6: months ago, and growth has really been fighting back in
Speaker 6: terms of defending its earnings dominance. So I wouldn't completely
Speaker 6: give up on things like the mag seven, you know,
Speaker 6: I would look for opportunities on the value side of
Speaker 6: the market. But I do think until we really see
Speaker 6: the earnings growth leadership seeded from growth to value, I
Speaker 6: think that growth is going to continue to fight back
Speaker 6: and you're going to see volatile trends. I will say
Speaker 6: in that context, one of my favorite sectors has a
Speaker 6: good mix of growth and value within it, And so
Speaker 6: our fresh money idea for twenty twenty five at the
Speaker 6: sector level is communications services. It's cheap, it's had positive
Speaker 6: earnings revision trends. There has not been a lot of
Speaker 6: talk about politics in this sector, which I frankly like,
Speaker 6: just given how a number of things could go in
Speaker 6: multiple directions. And when I look at my industry work,
Speaker 6: there's pretty broad based appeal by industry within that sector.
Speaker 6: So that's really the one we're emphasizing, you know, on
Speaker 6: more of the value side, I see opportunity and smaller
Speaker 6: cap financial especially regional banks, and on more of the
Speaker 6: growth a side. Areas we've been highlighting have been things
Speaker 6: like software and IT services, which still have pretty reasonable
Speaker 6: valuations and very strong earning trovision trends.
Speaker 1: That's going to be interesting to see which, if any
Speaker 1: sectors can stay politically agnostic heading into twenty twenty five.
Speaker 1: But in terms of the sector level, Cameron, what are
Speaker 1: you looking at?
Speaker 7: Well, we find opportunities across sectors, and we're more focused
Speaker 7: on the quality factor quality style of investing.
Speaker 4: Which is just to say that if we look over
Speaker 4: the last.
Speaker 7: Three months, there has been a big deterioration in the
Speaker 7: performance of quality names versus low quality, high beta, high
Speaker 7: momentum parts of the market. But what's interesting is that
Speaker 7: high beta, high momentum, low quality are all in the
Speaker 7: ninety ninethis percentile of outperformance. So we think that this
Speaker 7: is the time to not chase that part of the market,
Speaker 7: but instead look for those names as I mentioned earlier,
Speaker 7: with good balance.
Speaker 4: Sheets, with good free cash flow that simply.
Speaker 7: Have been left behind in the last few months of
Speaker 7: the low quality rally and using that as an opportunity
Speaker 7: to build into positions that we would consider Crown.
Speaker 1: Jewels and Laurie, I know you said that you wouldn't
Speaker 1: count growth out just yet, but can the MAG seven
Speaker 1: continue the kind of momentum that we've seen over the
Speaker 1: last several months.
Speaker 6: You know, it's a great question, and I think one
Speaker 6: of the reasons why this rotation has gotten started. It
Speaker 6: hasn't really been smooth. But one thing you're seeing in
Speaker 6: the MAG seven names is a acceleration of garning's growth
Speaker 6: in terms of expectations that are embedded in the market
Speaker 6: and the individual companies for twenty twenty five. So whenever
Speaker 6: we see hot growth momentum, ayas with accelerating Earning's growth,
Speaker 6: you know, if I think back over the last couple
Speaker 6: decades in my career, it tends to make investors very
Speaker 6: skittish and it tends to make you know, any sort
Speaker 6: of misstep really magnified in terms of negative price reaction.
Speaker 6: So I do think that that is a high hurdle.
Speaker 6: That being said, the value part of the market is
Speaker 6: just not stepping up and taking over leadership. And so
Speaker 6: when we look at twenty twenty five, earnings growth expectations.
Speaker 6: The MAG seven, you know, is I believe it's down
Speaker 6: in the single digits, but so is sort of the
Speaker 6: rest of the market, and it's not. The rest of
Speaker 6: the market is not able to surpass that MAG seven
Speaker 6: earnings growth. And when I look, you know, take a
Speaker 6: look at it slightly differently, and I look at the
Speaker 6: relative PE between a basket of top ten market cap
Speaker 6: names in the S and P, and I compare that
Speaker 6: with the rest of the market, and then I do
Speaker 6: the same analysis on long term earnings growth expectations. The
Speaker 6: relative pe is tracking the relative long term earnings growth expectations.
Speaker 6: They're almost an identical chart. So MAG seven is getting
Speaker 6: that superior valuation because the earnings growth expectations longer term
Speaker 6: are still vastly superior to the rest of the market.
Speaker 6: And until you see something change in terms of long
Speaker 6: term earnings growth expectations, that could be MAG seven falling apart,
Speaker 6: that could be rest of market really surging. But until
Speaker 6: something changes, I think that you're going to be stuck
Speaker 6: in elevated relative valuations for that top ten seven cohorts.
Speaker 6: And they basically the bottom line is they deserve the
Speaker 6: premium valuations that they're getting from an earnings perspective.
Speaker 1: Thanks for this, Laurie, and great to have you with
Speaker 1: us on as well. Cameron Dawson. That's new Edge Wealth
Speaker 1: Chief investment Officer, Cameron Dawson with us along with Lori Calvacina,
Speaker 1: had of US Equity Strategy at RBC Capital Markets. And
Speaker 1: we're going to wrap up our Daybreak Christmas special with
Speaker 1: a focus on the retailers this holiday season. Who better
Speaker 1: to do that with than Bert Flick and Jert managing
Speaker 1: director at Strategic Resource Group. Happy Holidays. Bert, I think
Speaker 1: it was a pretty happy holiday kickoff in terms of
Speaker 1: shopping season. So how the retailers do good kickoff?
Speaker 5: If you said, Nathan, in as stable finished, adjusted for inflation,
Speaker 5: November December sales should be up about one percent. Given
Speaker 5: the two thirds of American consumers is reported on the
Speaker 5: Bloomberg terminal or living paycheck to paycheck, good results for retail.
Speaker 1: Overall percent sounds pretty tepid. What does that tell us
Speaker 1: about twenty twenty.
Speaker 5: Five concerns ahead in twenty twenty five, Nathan, We're already
Speaker 5: seeing it in the wipeout of chain drug Chain, Dollar Specialty,
Speaker 5: Best Buy, Consumer Electronics, The only ones that are really winning, Nathan,
Speaker 5: is food and off price, and the rest are struggling
Speaker 5: and choice as many consumers for Thanksgiving, Christmas, Sonica, New
Speaker 5: Year's are buying buy now, pay for part of it now,
Speaker 5: pay for the rest of it later.
Speaker 1: Does that tell you that we're going to see a
Speaker 1: downturn getting into twenty twenty five if the consumer continues
Speaker 1: to be selective as it has been throughout twenty twenty.
Speaker 5: Four, Nathan, Yes, to your present point, we're expecting a
Speaker 5: strategic resource group downturn. The XRT on the Bloomberg terminal,
Speaker 5: the S and P retail indexes at an all time
Speaker 5: high going into this last week of December, and Walmart's
Speaker 5: pretty heavily valued targets probably undervalued with the Taylor Swift
Speaker 5: tailwind that will really help them the rest of this
Speaker 5: month and into the new year, but most of retail struggling.
Speaker 5: What's really a leading indicator on the terminal, Nathan, is
Speaker 5: the restaurant sales on a cash on cash basis were
Speaker 5: negative last month for the first time in about four years.
Speaker 1: So where do you see consumers concentrating their spending in
Speaker 1: twenty twenty five? Is it just going to be all
Speaker 1: about staples or is there room for some of those
Speaker 1: big ticket items to get a little bit of a
Speaker 1: look at least.
Speaker 5: Well big ticket items. Nathan has Bloomberg's reported, well, since
Speaker 5: Black Friday is Triple A is expecting record travel, close
Speaker 5: to one hundred and ten million travelers, most by power.
Speaker 5: But they're going to be spending on experience. This is
Speaker 5: seventy percent of the expenditure to your question, is going
Speaker 5: to be on an experiences thirty percent on retail. Retail
Speaker 5: people say is the best, Well, they're great bargains between
Speaker 5: today Christmas and Hanika Day into New Year's the smart shoppers,
Speaker 5: a lot of smart the stores and wait till Calendar
Speaker 5: twenty twenty five for desperation discounting. As the retail ice
Speaker 5: age accelerates and more retailers contract or some even collapse
Speaker 5: into bankruptcy and they have to liquidate more and more inventory.
Speaker 1: Wonder if that points to an opportunity for some retailers
Speaker 1: on an aspect that we've talked about in the past,
Speaker 1: providing more of an experience on the brick and mortar side.
Speaker 1: Is that something that's a possibility into next year? So
Speaker 1: does that point to an opportunity for retailers to provide
Speaker 1: more of an experience along the lines of an aspect
Speaker 1: of retail that we've talked about in the Passport.
Speaker 5: Nathan, you're raising a really important point about experiences, and yes,
Speaker 5: they're doing it well in London, Dubai, Paris, Toronto and
Speaker 5: throughout the Asia Pacific region. They're not doing it in
Speaker 5: the US, and we're seeing sax Fifth Avenue not investing
Speaker 5: in windows for the first time in their history, and
Speaker 5: we're seeing the ones who have experiences are winning. Specifically,
Speaker 5: Target wall the Wall on Taylor's Swift's eras tour release
Speaker 5: of her book, her music, her licensed merchandising. Big win
Speaker 5: for Target. Kroger Company always a big partner of Disney,
Speaker 5: big winner experientially Wall the Wall from Disney to societal
Speaker 5: good for people from all walks of life, especially for
Speaker 5: people who are nutritionally and economically target challenged. So win
Speaker 5: for Kroger, win for Target, not a win for the
Speaker 5: rest of retail in terms of experiential, which is so
Speaker 5: important this time of year.
Speaker 1: How do you see retailers making that kind of investment
Speaker 1: in an experience? Do they have the wherewithal to do it?
Speaker 5: Nathan, it's ironically or radiosyncratically, it's an investment, as you said,
Speaker 5: rather than an expense. It's almost analogous to retail crime.
Speaker 5: The Kroger company, in Costco and Target invest in crime
Speaker 5: prevention for shopper, worker and vendor security the same way
Speaker 5: they invest in experiences to really excite and delight shoppers
Speaker 5: of all ages, where Walmart treats everything as an expense.
Speaker 5: And one of the things in the attachments we sent
Speaker 5: for Another day another time is Walmart fails worldwide where
Speaker 5: they don't get subsidies and in the US, taxpayers subsidized
Speaker 5: Walmart target, Amazon, Aldi and Costco at the expense of
Speaker 5: retailers that pay their own way like Kroger, CBS, etc.
Speaker 5: So the retailers that are subsidized do not invest in
Speaker 5: experiences and oftentimes do not invest insecurity, which is the
Speaker 5: ultimate consumer and commercial irony across America.
Speaker 1: It sounds like a challenging backdrop heading into twenty twenty
Speaker 1: five for retail. Thank you for this, Bert, really appreciate it.
Speaker 1: Thanks to Bert Flickinger, Managing director at Strategic Resource Group,
Speaker 1: along with Lori Calvacina of RBC Capital Markets, New Edge
Speaker 1: Wells Cameron Dawson and Tom Porcelli at PGIM Fixed Income.
Speaker 1: And thanks to you as well for listening on this
Speaker 1: Christmas Day. I'm Nathan Hager, wishing you a very happy
Speaker 1: and healthy holiday season. But stay with us. Today's top
Speaker 1: stories and global business headlines are coming up right now